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Signs Point to a Cooling Housing Market, says Scotiabank Economist

TORONTO, June 4 /CNW/ - Short-term cyclical factors are consistent with a
gradual cooling off in Canada's housing market over the next several years,
according to the latest Real Estate Trends, released today by Scotia
Economics. At the same time, long-term fundamentals, including slower
population growth, are expected to dampen the demand for housing.
According to the report, the country's average annual rate of population
growth is projected to slow to just 0.8 per cent over the coming decade,
reflecting an aging society and historically low fertility rates.
"This less favourable demographic trend does not in itself pose a major
risk to the housing outlook," said Adrienne Warren, Senior Economist, Scotia
Economics. "Real household income growth and the level of interest rates have
a statistically more significant influence on housing sales and price
appreciation."
Yet the expected moderation in underlying housing demand comes at a time
when affordability is at a cycle low, supply conditions are becoming better
balanced and pent-up demand has largely been satisfied, potentially
reinforcing the industry's more subdued prospects.
"Demographic shifts will also influence the type of housing in demand,"
added Warren. "In particular, the changing age structure of the Canadian
population and the growing significance of immigration will likely favour
certain forms of housing and certain geographical areas."
The Canadian population aged 25-to-44 years - those with the highest
probability of buying a home in any given year - is projected to increase by
just 2 per cent between 2006 and 2016, or by 195,000. All of the growth will
come from the youngest in this cohort (aged 25-to-34 years), reflecting the
maturing of the baby echo generation. "These buyers, many of them singles or
young professional couples, should support continuing moderate demand for
entry-level homes and condos, particularly in urban centres close to
employment opportunities," said Warren.
Meanwhile, the population aged 35-to-44 years (essentially the much
smaller baby bust generation) is expected to decline in absolute numbers over
the same period. This group encompass both first-time buyers and households in
their early "trade-up" years. They are more likely to have young families and
relative to their younger cohort, favour larger suburban homes, a real estate
segment that could underperform.
At the same time, the number of Canadians aged 45-to-64 years is
projected to rise by 15 per cent (1.3 million) while Canadians 65 and over
will jump by 65 per cent (1.5 million). Even taking into account the higher
level of housing market activity of younger Canadians, the number of sales
involving both late-stage "move up" buyers and "downsizers" could dominate
those of more traditional homebuyers. Warren added, "While the lifestyles and
housing needs of these more mature homeowners vary widely, an aging population
should favour new construction over resales, lower maintenance options such as
condominiums, second homes and vacation properties, and urban areas with
greater amenities."
"Immigration will also play an increasingly important role in shaping
housing demand," said Warren. "Immigration has been the dominant source of
household formation since the early 1990s, a trend that will accelerate over
the coming decade as the rate of natural population growth continues to slow."
Net international migration is expected to account for over two thirds of
Canada's population growth between 2006 and 2016, something not seen since
Wilfrid Laurier was prime minister. Immigration could be Canada's only source
of population growth by about 2030.
Relatively weaker earnings growth vis-à-vis native-born Canadians is one
possible factor behind the apparent difficulty faced by some recent immigrant
households in making the transition from renter to homeowner. Recent policy
initiatives to aid in assessing and recognizing foreign professional
credentials will hopefully result in a better performance on this front.
Immigrant families are also more likely than native-born Canadians to locate
in major cities where homeownership rates in general are lower, and home
prices higher.
However, the strong wave of immigration since the early 1990s remains an
ongoing important supportive factor for housing. Homeownership rates rise with
the duration of residence, and is concentrated among foreign-born who have
lived in Canada for 10 years or more, reflecting the time needed to accumulate
the necessary savings.
"More than one third of foreign-born residents in Canada's largest urban
centres have been in Canada for ten years or less. This suggests a significant
pool of potential homebuyers ready to enter the Canadian real estate market,"
said Warren. "The "typical" homebuyer in the coming decade will not be as
traditional as in the past, having more diverse social and demographic
characteristics."
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